The steep fall in the Indian stock market in the past six months has led to a sharp decline in valuations, but it’s commonly acknowledged that India is still expensive compared with other emerging markets. That premium has, however, been shrinking.
(PRICE FACTOR) A recent emerging market equity strategy report by JPMorgan Chase and Co. estimates that the MSCI India Index is currently trading at a 12-month estimated price-earnings, or P-E, multiple of 13.6, which is a premium of 13.3% to the MSCI Emerging Markets Index, compared with a premium of 64% at the beginning of the year.
The same trend is visible for China. While MSCI China traded at a premium of 42% to the Emerging Markets index at the beginning of 2008, its premium is now a mere 6.7%. The rather obvious conclusion is that during bouts of risk aversion, it’s the markets where valuations are at a premium are the ones that suffer the most.
But the JPMorgan numbers throw up a much more interesting point than banal homilies about premium valuations. The data show that despite all the talk about how expensive India is, the 12-month estimated P-E multiple for the Indian market is now lower than that for the MSCI US Index, which has an estimated P-E of 13.7. Moreover, if we consider JPMorgan’s estimate for 2009 earnings, then the price multiple for MSCI India is 12.5, while the valuation for MSCI US is 12.7.
What’s more, the return on equity, or RoE, for the US market, at an estimated 18% for 2009, is also lower than the MSCI India estimated RoE of 20.7%. Another interesting fact is that the MSCI Global index, at a 12-month estimated P-E of 12.5, is trading at a premium to the emerging market index, valued at a 12-month estimated P-E of 12. That’s an indicator of the extent of risk aversion. The table shows the country rankings in terms of 12-month estimated P-E.
Using this metric, Japan turns out to be the most expensive market, followed by Chile, the Czech Republic, the US and India. Yet that hasn’t prevented investors from pouring funds into the Japanese market in recent weeks. Global fund tracker EPFR.com points out that “in the second quarter, Japan funds have come back into favour and finished the quarter posting eight straight weeks of net inflows even as global markets were crumbling.” There’s more to fund flows than just valuations.
TVS shares get in line with financial performance
For much of the last financial year that ended on 31 March, the markets conveniently ignored the drastic drop in the performance of two-wheeler maker TVS Motor Co. Ltd. Between 1 April 2007 and 7 January, TVS Motor’s shares rose by as much as 30% to Rs77.5, at a time its motorcycle sales fell by a third and profits fell by two-thirds last year.
The crash in the markets since January has taken care of this disconnect. The company’s shares now trade at Rs26, a drop of 66% since early January.
One of the reasons the auto maker’s shares were not affected last year was a belief among investors that since the company has a low operating margin (2.2% last year), a turnaround would lead to a sharp jump in profits.
Even if revenues remain flat, a 100 basis points increase in margin would lead to a near 50% jump in profit.
But for companies such as Hero Honda Ltd, which operate on double-digit margins, a 100 basis points increase in margin would result in profits increasing less than 10%. Hundred basis points make one percentage point.
Incidentally, this factor worked in TVS’ favour in the recently reported March quarter results. Although its revenues dropped by nearly 20%, operating profit jumped 78%, thanks to a margin improvement of 135 basis points. The base for the comparable period last year was dismally low, with the company’s margin being a mere 1.1%. This largely explains the improvement in performance in the March quarter.
But the markets are not betting on an encore. The company’s shares hit new lows after the results were announced last week.
Its performance last year was worse than its peers because of delays in the launch of new models. While the company launched the much awaited 125cc Flame in March, the outlook for the current financial year is anything but heartening, with interest rates soaring and hardly any respite on the cost inflation front. Its recently launched operations in Indonesia are expected to weigh down overall performance as well.
Enam Research, which has an “underperformer” rating on the stock, says, “We believe TVS will continue to remain under pressure in FY09 as competition and the Indonesia operations weigh down operating performance.”
What’s interesting is that despite the battering the stock has received this year, it still trades at a rich 12.5 times estimated earnings, based on Enam’s estimates.
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